As you can imagine, clients have been asking me how the new tax law will affect Real Estate so I’ve outlined some changes to be aware of.
Mortgage Interest Deduction:
The final bill reduces the amount deductible from $1 million to $750,000. This is for mortgages taken out after 12/14/2017. Mortgages taken out before that are grandfathered in.
Homeowners may refinance mortgages which were in place on 12/14/2017 and deduct up to $1 million in interest as long as the homeowner does not increase the amount of the mortgage.
Interest paid on Home Equity Lines or second mortgages are no longer deductible unless they are/were used to substantially improve the property. This applies to all loans that fall into this category, regardless of when they were taken out.
Interest on second homes is still deductible up to $750,000 after 12/14/2017.
Deduction for State and Local Taxes:
Up to $10,000 total state and local property taxes and income tax may be deducted. Note that the law states that these amounts may not be “prepaid” in 2017.
Capital Gains on the Sale of Real Estate:
Capital gain exemptions for primary residences remain the same. Individuals can gain up to $250k and couples can gain up to $500k without incurring capital gain.
The law left in place the ability to avoid paying capital gain on investment Real Estate by exchanging into like-kind properties (1031 exchanges). It repealed non-real estate personal property exchanges formally allowed under Section 1031.
These will no longer be deductible except for military personnel. This will definitely affect how relocation departments handle job transfers.
End result for Real Estate
Due to the cap on itemized deductions, and the increase in the standard deduction, most potential home buyers will find that the “homeowner tax advantage” is substantially reduced, as they will end up using the standard deduction instead of writing off their mortgage interest and property taxes.
Here are examples of how this new law will affect two potential homeowners as figured by the National Association of Realtors.
End result for Oregonians
This tax cut clearly favors the wealthy and corporations, as the largest (and longest lasting) changes fall on their side of the table. It also favors states that have lower taxes. According to the Oregon Center for Public Policy, Nearly one in ten Oregonians will see a tax increase. The highest-earning 1 percent of Oregonians can expect an average tax cut of over $33,000 in 2019, while the lowest-earning 60 percent of Oregonians will average a $430 tax cut.
End Result for Americans
As the tax cuts for individuals expire after 2025, the final analysis must look at what happens over the next 10 years. This chart shows the effect the tax law will have on different income earners after the reductions expire. This analysis does not take into account the effect the reduction in revenue will have on infrastructure, education, healthcare, and social services.
As you can see from these examples, there are many factors that go into how you are taxed, so if you have specific questions about how this will impact your personal tax liability, be sure to check with a professional.